Entering International Contracts?

Last ten months, I started studying International Business Management and I would like to give a glimpse and probably aid you, reader. That is if you are interested in this type of context. International trade which deals with international transportation arrangements are being considered especially in the sale of goods. However, have you ever wondered which party will be responsible if the goods are damaged? Here are some points which could help you get an overview of how it is being done.

It is very important to make sure that the goods that will be transported via sea or air would be insured using the services of reliable insurance brokers. Insurers need to be aware that to be able to acquire insurance agreement, they have to have insurable interest. This means that, if an insurer was not able to avail insurance, it could result into one of their financial difficulties. It is necessary that the insurer, at the contract creation, would disclose every material that he/she wanted to insure. If an insurer wanted to cover all the possible risks and paid for the total loss, under the principle of subrogation, the insurer could pursue all rights and solution for any of his/her losses.
One important thing to be considered is the payment terms when both parties (importer and exporter) have agreed on the goods to be shipped. This is where documentary credit or letter of credit (L/C) would come in handy. Both parties have their own concerns when dealing with international transactions.

For the exporter, he/she wanted to acquire the payment first before transporting the goods. However, for the importer’s point of view, he/she would not pay until the goods are in his/her hands. Thus, they seek help from international bankers.

                                                 Photo from focusmono.com

Letter of credit guarantees payment from a bank on behalf of a buyer as long as certain delivery conditions have been met. There are four parties (exporter, importer, confirming bank and issuing bank) involved in the whole process of issuing a documentary credit. First, the exporter will deliver the goods to the importer. Then, the exporter will provide the documents to the confirming bank in their country that he/she has delivered the goods in compliance with the importer’s requirements. Thus, the confirming bank had to pay the exporter in behalf of the importer. The confirming bank had to contact the issuing bank from the importer’s country to provide the payment considering that the confirming bank could present that they already paid the exporter on behalf of the importer.

Consequently, the issuing bank will contact the importer and will provide the documents that they have paid on behalf of them (importer). A documentary credit may include negotiable instruments such as bills of exchange (drafts) or cheques, which provides greater rights to the receiver since ownership of this document could be transferred.  It is significant in trade as it can be used in negotiating payment between parties. If party A needs to pay party B through a draft but then would receive a draft from party C, draft from party C could be negotiated to pay party B instead. However, it is important that the parties are informed while doing the negotiation as endorsement (signing) and delivery would take place after.

Another main documentary credit type is a standby letter of credit, which guarantees payment to the exporter.

Trade Photo from ecodaily.org

For example, if the importer couldn’t pay on time for the amount issued by the exporter, the issuing bank – not the importer who failed to deliver – pays the exporter. In simple terms, documentary credit expects positive events while standby letters of credit prepares for negative events in trade. Despite the differences, both are trusted by financial institutions, irrevocable, independent and governed by ICC rules. No, it’s not International Cricket Council but for International Chamber of Commerce.

A performance bond is somewhat similar to the idea of standby letters of credit as it guarantees payment to the client. However, a surety issues it and a surety will only pay for the costs if they could receive certification which proves the applicant’s non-performance. In contrast with standby letters of credit, the client could easily obtain payment faster and easier.

It is necessary that documents to be presented to the banks comply with the principles of letter of credit (LOC) as discrepancies could lead to a rejection. With (1) Autonomy of the Letter of Credit, there is an assurance of payment to the seller as long as they were able to present correct adequate documents. A risk here could be: the exporter will receive a payment while breaching their sales of goods/services’ contract with the importer. The second principle, (2) Doctrine of Strict Compliance, deals with strict conformity, which requires all documents from both parties should not display conflicts with the terms of credit. Even a slight error could result to a refusal. It may be corrected but it could lead to some problems as creates a chance for the paying party to avoid the payment.

The Angelica case discusses about the issues with regards to these principles. There are four parties: Angelica and Bank of Nova Scotia (Importer) and Protective Clothing and Shanghai Bank (Exporter) in this case. Basically, installments of shipment would be delivered from Taiwan to Montreal and will only be paid by Angelica after the delivery of the shipment. However, after the second shipment before the second payment, Angelica found out that there are issues in relation to the documents from the exporter that is why they wanted to postpone the payment to the exporter. Issues were about documentary compliance of the exporter. (1) Inspection Certificate referred to wrong letter of credit, (2) Commercial invoice has a different quantity in comparison with the inspection certificate, (3) Second shipment’s bill of lading required in L/C instruction was prepaid to Vancouver instead of Montreal. Yet, after acquiring legal advice, Bank of Nova Scotia still paid by debiting Angelica’s account.

The first two issues are not enough to justify the refusal of payment since the exporter was still able to provide the required documents. Take note that the bank makes payment based on the documents alone and not on the basis of delivery of goods and services that comply with the contract. As for the third issue, it is stated in the letter of credit that the bill of lading for the second shipment should be prepaid to CIF Montreal and not Vancouver. Thus, Angelica won its case in the documentary compliance. As for the fraud issue, Angelica did not succeed because: (1) the fraud is not clear and obvious at the presentation of the documents; (2) Angelica was not able to establish the fraud at a pertinent time. Even though it’s possible perform injunction where the court could cease the bank from paying, having a weak evidence of fraud was not be enough. It is significant that risks and liability are managed in international contracts.

Tort Law tutorial: Vicarious and Strict Liability | quimbee.com

Tort liability is one of the major challenges in this area. Under this civil law, there are components that a plaintiff must prove: (a) The defendant has acted negligently which causes the plaintiff to be injured considering that they have a close relationship,  (b) the defendant was not able to exercise a degree of prudence and caution in a given situation which also causes plaintiff’s loss. One extension of tort is product liability, which is a liability for consequential damage based on product defect. It is based on contract and not tort.  In 8.6 Snail in the Bottle case, the plaintiff could not sue in contract since she doesn’t have any with her friend nor with the shopkeeper. Thus, the manufacturer of the ginger beer was sued since they prevented a consumer from discovering a defect.

Photo from ccmostwanted.com

International cooperation is necessary and as technology continues to evolve, mitigating the possible risks would be harder as the rules were basically designed for paper documents. A uniform and a standard format must be followed for an e-document to be accepted the same way as a paper document could be accepted.

I hope that helps you get a rundown of how things work! Have a good day!


Nicholson, Mary Jo, and Alyssa Brierley. “8.” Legal Aspects of International Business: A Canadian Perspective. N.p.: n.p., n.d. N. pag. Print.


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